Federal Actions Loom Over Maryland’s Bond Rating

During the budget hearing on Public Debt before the Senate Budget and Taxation Committee on February 12, State Treasurer Nancy Kopp informed the Committee that federal sequestration and the resulting reductions to the State budget could lead to a downgrade of Maryland’s Triple-A bond rating by Moody’s Analytics.  As reported by MarylandReporter.com:

On Tuesday, Kopp told the Senate Budget and Tax Committee that she recently had discussions with Moody’s representatives. She argued that Maryland’s educated workforce and “conservative budget” make it worthy of the agency’s highest credit rating. But the agency has refused to budge on its position that Maryland’s creditworthiness depends upon the outcome of Washington budget negotiations.

“There is this cloud on the horizon,” Kopp said. “If those ladies and gentleman on Capitol Hill can’t get it together and reach the consensus that Moody’s wants, then they will downgrade the United States, and they might downgrade Maryland, too.”

This is not the first time Moody’s has raised downgrading Maryland’s bond rating status.  Maryland was issued a “negative outlook” during federal fiscal discussions in 2011.  Treasurer Kopp mentioned that a downgrade would not occur before the State’s March 6 bond sale.
The budget analysis prepared by the Department of Legislative Services did not mention this issue, but it did raise some other issues of interest.
Long-term Problem: Cost of Debt Exceeds Projected State Property Tax Revenues: General obligation (GO) bond debt service costs are supported by the Annuity Bond Fund (ABF). The fund’s largest revenue source is from the State property tax. Over the next few years, State property tax revenues are estimated to remain fairly flat. This contrasts with debt service costs, which are expected to increase steadily in the out-years. General funds or tax increases will be needed to support debt service costs. The State Treasurer should be prepared to brief the committees on the status of the ABF.
Not Helping: Capital Budget Expansion: The new capital spending plan proposes to increase GO bond authorizations by $150 million annually for five years beginning in fiscal 2014. This increases debt service costs. The State Treasurer should be prepared to brief the committees on the effect of increased capital budget authorizations and debt service costs.
The Treasurer’s response to these items can be found on the State Department of Budget and Management’s website.